A few states have begun discussing “a once-unthinkable scenario” — dropping out of the federal-state Medicaid program — in an attempt to save money, the Wall Street Journalreported today. Under one proposal, instead ofexpanding its Medicaid program in 2014 as the health reform law requires, a state would eliminate the program and give up federal Medicaid funding on the assumption that it could shift most beneficiaries into the new health insurance exchanges that the law will create, where they would get federally funded tax credits to buy health coverage. The state would then cover the rest of the former Medicaid beneficiaries entirely with state funds and somehow come out financially ahead.

This proposal, however, relies on flawed assumptions and would be a terrible deal for a state:

Most Medicaid beneficiaries — including those who cost the most to cover — actually can’t be shifted into the exchanges because they won’t be eligible for the federal tax credits. Only people with incomes between 100 and 400 percent of the poverty line will qualify for the credits, which means no poor Medicaid beneficiaries (except for some legal immigrants) will qualify. For example, poor people with disabilities, who have the highest medical needs of any Medicaid beneficiaries and incur the most costs, won’t be eligible for the federal tax credits.Similarly, anyone who is eligible for Medicare won’t be eligible for the federal tax credits, so the millions of seniors whose incomes are low enough to qualify them for supplemental Medicaid benefits (like nursing home and other long-term care services) as well as Medicare won’t qualify. This group alone represents 35 percent of all Medicaid costs.

The loss of federal Medicaid funds would likely force states to slash their remaining health programs. Under current law, the federal government picks up 57 percent of the cost of a state’s Medicaid program, on average. Since states will be unable to shift most of their Medicaid beneficiaries — and very few of the higher-cost people who constitute the bulk of current spending — into the exchanges, they’d have to somehow make up for the loss of these federal funds.Unless states were willing to as much as triple their current contributions to the cost of health care, they would have to severely curtail their health care spending. Many would likely end up eliminating publicly funded coverage for large numbers of low-income children, pregnant women, parents, people with disabilities, and seniors. Most of these people could well end up uninsured.

For the people who remained eligible for publicly funded coverage, states might scale back benefits. Possible reductions include benefits that are important to people with disabilities and children with special health care needs, such as mental health care and therapy services, which Medicaid covers but private insurance typically doesn’t. States might also increase cost-sharing charges, which means fewer people would receive needed health care.

And although states have already sharply reduced their reimbursement rates for Medicaid providers (such as doctors and hospitals) to help close their budget deficits, they would have to further lower their rates — at the same time that providers would face rising costs for uncompensated care costs as the ranks of the uninsured swell.

The federal government will pick up nearly all the costs of the Medicaid expansion. Claims that the health reform law’s Medicaid expansion will impose unaffordable burdens on states ignore the fact that the federal government will cover virtually all of the cost— 96 percent of the cost over the next ten years,according the Congressional Budget Office. The expansion will add just 1.25 percent to what states were already projected to spend on Medicaid over that period in the absence of health reform.

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More About Edwin Park

Park is Vice President for Health Policy at the Center on Budget and Policy Priorities, where he focuses on Medicaid, the Children’s Health Insurance Program, and issues related to federal health reform.

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